On Turning Japanese

Mr Sumi, President Tokio Marine with Charles Franks and Edward Creasey on the acqusition of Kiln in 2008

Mr Sumi, President Tokio Marine with Charles Franks and Edward Creasey on the acquisition of Kiln in 2008

AM Best’s annual list of the world’s largest insurers published earlier this month was notable in that four Japanese life assurance companies, who all jumped in the rankings, are now firmly in the top ten in terms of net premiums written; the greatest presence by any single country. Japan Post is in fact the largest insurance company in the world measured by net assets. In the non-life sector after a brutal round of consolidation three enlarged insurance groups centred on Mitsui, Tokio Marine and Sompo have emerged. With no shortage of fire-power, the Japanese firms have started to flex their financial muscle to build and strengthen their international presence.

The motivation to seek out opportunities abroad rather than locally is easy to understand. The domestic economy in Japan has been stagnating for several years. An increasing share of resources channelled to meet the rising pension and health care costs of an aging and shrinking population has reduced GDP growth to anaemic levels. With few acquisition targets remaining, insurers now have only organic growth as an option to develop and there lies the problem. Despite being the second largest in the world, the Japanese non-life insurance market has in fact declined in size in both real and nominal terms every year other than two since 1997.

In setting up syndicate 3210 in 2000, Mitsui was the first Japanese company to establish a presence at Lloyd’s and Tokio Marine added significantly to the footprint by acquiring one of the leading managing agents RJ Kiln in 2008. Attracting overseas trade investors to diversify Lloyd’s capital base is key to the Corporation’s Vision 2025 so the recent decision of Japanese conglomerate Itochu to also join the party was well received. Whilst their 5% stake in the 2013 underwriting of Antares, equivalent to YEN 1 billion, is a rounding error for the giant trading firm, all the talk suggests a more meaningful interest in the future. And it is not just underwriting. In the last few days another Japanese trading house Marubeni has concluded a business cooperation agreement via its subsidiary Marnix with ambitious London Broker Cooper Gay.

For the Japanese to focus their international development through London, with its unrivalled network of global connections and licenses makes sense although firms like Mitsui and Tokio Marine have been servicing their multi-national Japanese clients from UK for years. What has more likely prompted the latest wave of interest is the access to underwriting expertise, methods and management that a large-scale investment in a London presence offers. The current industry leadership in Japan learnt their trade in a time when their market was quasi-tariff controlled: successful marketing, customer service and retention was more a driver of profits than pricing and risk selection. All that has since changed so by now tapping into London’s technical capabilities Japan’s insurers can evolve a more modern business strategy maximizing bottom line returns as much as top line growth. Traditionally introspective and hesitant internationally yet we might look back on this decade as the time when re-focussed Japanese insurance powerhouses finally take their place on the global stage.

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2 Responses to On Turning Japanese

  1. Iain Ferguson says:

    An interesting blog/article Roger. With Sompo, Aioi Nissay Dowa and NipponKoa also providing support to the Lloyd’s market, Japanese involvement has never been stronger…

    In my view, compared to the overseas asset splurge we saw Japanese companies indulge in during the latter years of the bubble, there is one important difference this time – focus!

    Back in the bubble there seemed to be some ‘trophy’ investment or investment for investments sake going on, even outside the investor’s own trade. At times, it seemed that half of California and Hawaii belonged to the Japanese! Of course, when the bubble burst, it all went badly wrong.

    This time around the investments are clearly linked to strategic expansion strategies and are trade specific. The Yen may fall back closer to 100/$ (I’m not expecting any more than that) and stock markets have already seen major corrections, so this time around it should all be much more robust. With the demographically-driven forecast drop in domestic demand though, even if the Yen does move beyond 100/$, the fundamental drivers for overseas investment will still be valid and I would expect outwards M&A to continue…

  2. Paul McGee says:

    Roger thank you
    You write in an incredibly fluent style. You should write a book.
    The Japanese international expansion is sure to intensify for the reasons you say – the return on the trillions of yen in those groups is so small domestically – the “only” barrier is the 2 way culture/communication that is essential to success – the shrinking world will see to that but the pace needs to increase. Delegating decisions and trusting the overseas (to Japan) partners is at the centre of the challenge.
    best
    Paul

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